FX Markets Best Banks Awards 2021: CME Group and EBS secure wins in three categories

CME Group’s EBS business allowed all-areas access to liquidity at the time market participants craved it most: when the pandemic applied stress and uncertainty to markets and caused great swings in volatility 

Over the past few years, the effects of the Covid‑19 pandemic have had an unprecedented impact on FX markets, creating uncertainty and large swings in volatility. Throughout it all, the importance of primary venues such as CME Group and its EBS business remained central to providing a robust and transparent marketplace where clients could access liquidity when the market was at its most volatile and during times of market stress.

As a primary spot FX trading venue for the interbank market of many of the world’s major currency pairs, EBS is one of the fundamental pillars of the FX market that many traders rely upon to efficiently execute trades under the most of challenging circumstances. While the events of 2020 are certainly not the most extreme of shocks to have hit the FX market in the past decade, they nonetheless highlighted the critical role such venues continue to play in price discovery and the overall functioning of the FX marketplace.

“Throughout the history of FX markets, we’ve seen market-moving events that were potentially even larger than those we saw in March 2020,” points out Jeff Ward, global head of EBS. “The FX market is accustomed to the type of market-moving events that cause spikes of volatility. That said, having a marketplace of natural interest like EBS is especially important during these volatility spike events and support the functioning of the FX markets.”

When two become one

It is EBS’s frontline role in keeping FX markets trading in 2021 that saw it recognised as the best broker for spot at the 2021 FX Markets Best Banks Awards, along with best broker for non-deliverable forwards (NDFs). In addition, the breadth of CME Group’s FX suite, which spans all services across the pre- and post-trade spectrum, saw it voted best FX clearing house.

While EBS and CME Group’s listed FX businesses have remained distinct offerings since CME Group’s acquisition of NEX Group in 2018, the upcoming migration of EBS on to CME Group’s Globex electronic trading platform in April 2022 will be a seminal moment for the firm. For the first time ever, clients will be able to access two of the primary FX liquidity pools on a single technology platform.

“The integration of EBS into Globex will allow clients that may not have had access to both trading platforms to compare the complementary nature of listed and over-the-counter [OTC] FX products side by side and allow them to see the value of both liquidity pools,” explains Ward. “Providing insight into the benefits and liquidity in both pools will be a key area of focus for us going forward.”

Electronification of NDFs marches on

Bringing EBS onto Globex is a unique development in the FX industry in that it brings the worlds of listed and OTC FX closer than ever, but – perhaps more importantly – it provides market participants trading on Globex with greater price discovery opportunities across a wider spectrum along the FX curve.

In the past, market participants struggled to accurately determine forward points along the FX curve across multiple pools of liquidity. This is now made available on a single platform. OTC clients will be able to benefit from futures price discovery with the ability to connect to those two markets.

In July 2021, EBS announced that it had gone live with EBS Direct, its new next-generation relationship-based quote-driven platform. “Most of our API [application programming interface] clients have already been migrated and we’re seeing really promising results.

“We are witnessing sub-50 microsecond performance for both market data and order execution on the platform, which we believe is one of the best in the direct trading world. We are now in a position to help our clients to harvest the benefits of that new trading platform in terms of increased fill ratios, improved overall execution costs and reduced market impact.”

Electronification of NDFs marches on

Despite some degree of internalisation growth by some customers, overall NDF volumes and volatility in 2021 remained robust, with volumes on EBS’s swap execution facility (NEX SEF) seeing a healthy pick-up in trading activity.

Asian NDFs remain the mainstay of the market as they steadily progress on EBS’s central limit order book (Clob). EBS Market is a testament to their high-level of maturity. Auto-hedging and automated liquidity provision have now become the norm for these pairs and a large share of trades under $10 million in the one-month tenor takes place on the Clob. Odd date trades, longer-dated tenors and larger trade sizes between dealers and clients are still largely traded on a request for quote basis on EBS Direct or via voice brokers.

For their part, volumes of Latin American NDFs – and particularly Andean pairs – have grown in double digits, albeit from a low base. While trading in these pairs remains largely voice-driven at the moment, Ward believes that with the number of clients that have begun to trade Latin American NDF pairs electronically in 2021 via API, there are opportunities for strong growth in 2022 in that space.

Future growth in NDF pairs is also likely to be further boosted in the years to come as the regulatory differences in some jurisdictions covering the trading of NDFs begin to converge. The top three FX trading centres – the US, Europe and Singapore – have already adopted similar FX derivatives legislation.

“The regulatory landscape changes in the NDF market will lead to greater opportunities in 2022 and beyond,” says Ward. “As regulatory differences in key jurisdictions harmonise, our focus will be to rethink how we operate NDF platforms and whether it is feasible to move to a single liquidity pool or perhaps offer our services under different regulated entities.”

Benefits of clearing

The breadth of services CME Group offers has been a catalyst for a healthy level of trading activity in 2021 as well as a robust growth in the number of new clients coming onboard in 2021. Despite low interest rates worldwide, the level of uncertainty that the pandemic continues to instil in the markets is generating a lot of trading activity.

The average daily open interest for listed FX contracts is at an all-time record high of 3 million contracts, with notable high levels of activity in the euro and Canadian and Australian dollar currency pairs.

The number of large open-interest holders is also at a record level – totalling more than 1,200 – which is being driven by an increase in end-user activity, notably asset managers. While uncertainty in the markets is partially responsible for the several hundred new players having come onboard, the approaching deadline of phase 6 of the uncleared margin rules (UMR) in September 2022 is garnering a lot of interest in exchange-traded FX contracts.

The lowering of the average aggregate notional (AANA) amount threshold from €50 billion in phase five to €8 billion in phase six will oblige a significant number of buy-side firms to post initial margin on uncleared OTC derivatives. This is a game changer for the FX market as hundreds – potentially thousands – of firms are likely to be caught in this last phase.

This has driven many of these smaller buy-side firms to opportunistically switch to the listed futures and options offering available at CME Group, says Sunil Cutinho, president of CME Group Clearing. The benefits of clearing through a single counterparty are essential in helping these new clients manage their FX exposure in the most capital-efficient way possible. Cutinho expects CME Group’s listed FX options will become ever more attractive to these market participants as they can achieve credit and capital efficiencies of nearly 90% compared with their uncleared counterparts. For many firms, this added efficiency is heartily welcome as they will begin posting margin for the first time this year, while for others it means that their FX exposure may actually fall below the phase six AANA levels and thus remain out of scope of UMR altogether.

While clearing is the backbone of all exchange-traded futures contracts, CME Group has made listed FX more attractive still by making it less expensive to enter futures positions and roll them over. Over the past two years, the exchange has reduced minimum price increments by up to 60% on eight different pairs and cut the increments on spreads as well. Reduced minimum price increments have also been extended to listed block trades.

Advantage capital efficiencies

In addition to listed FX futures and options, market participants can also benefit from CME Group’s NDF and OTC clearing services or take advantage of the capital efficiencies from trading the spreads between OTC spot and listed futures via FX link.

“Our goal is to give clients a full set of complimentary services so they can make the best choice that meets their needs,” explains Cutinho. “We feel that, based on the growth we’ve seen in listed futures and options, our strategy has paid off. Between a single trading platform supporting OTC and listed contracts and post-trade capital efficient solutions, we offer our clients one of the most comprehensive platforms on the market.”

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